Hope you had a wonderful and safe, long holiday weekend.

Last week was another tough one in the markets. Equity markets were down over 3%; Commodities were down over 3%; Bonds were down 1% (Morningstar, Sept. 2022). Hard to find many positives. T-Bills had a slight gain! (Morningstar, Sept. 2022)

It’s still been a good quarter so far though, with a month to go. US equities are up about 4%, though international stocks have slight losses (Morningstar, Sept. 2022). While high quality Treasury bonds have a slight gain on the quarter, the Barclay’s Aggregate Index has a slight loss as corporate bonds have had losses (Morningstar, Sept. 2022). It’s usually not an awesome sign for credit to underperform as many consider credit to be a potential leading indicator of stock prices.

Bottom line, it’s been a tough year for traditional stocks and bonds, as commodities are the only bright spot this year and over the last year (Morningstar, Sept. 2022). That said, the 3- and 5-year numbers still look very solid for balanced portfolios (Morningstar, Sept. 2022).

Deeper Dive 

Ten-year Treasury yields last week finished at 3.19% (up another 14 basis points over the last week) (Yahoo! Finance, Sept. 2022). The range last week was from 3.07% to 3.29% (Yahoo! Finance, Sept. 2022).

  • The yield to maturity on the Bloomberg Aggregate Bond Index also rose last week to 3.96% as of August 26 (Bloomberg, Sept. 2022). It’s notable, however, that the high last week of 4.03% also matched the cycle high on June 14 at 4.03% (Bloomberg, Sept. 2022). This also represents 10-year (at least) highs (Bloomberg, Sept. 2022).
  • The average money market yield is now 2.01% as of Sept. 2, 2022 (Crane Data, Sept. 2022).
The average 30-year fixed mortgage rate increased to 5.95% (up 3 basis points) last week (Bankrate, Sept. 2022). Mortgage rates have clearly spiked this year and are also at 10-year highs, but given mortgage rates over the last 50 years, they are still low by historical standards (Bankrate, Sept. 2022).

Investor sentiment, which had moderated on the back of recent market gains, moved clearly back to bearish levels again (AAII Survey, Sept. 2022). Historically though, when sentiment gets bearish like this, the market tends to produce above-average positive returns in the following 3-, 6- and 12 months (AAII Survey, Sept. 2022).

Scared about the markets? Take this advice from Dr. Daniel Crosby: If you wait for perfect conditions, you will never get invested, from The Coast Will Never Be Clear post on LinkedIn, Sept. 2, 2022.

Investor sentiment remains negative, but equity allocations remain near all-time highs, according to BofA Global Investment Strategy (Weekly S&P500 ChartStorm, Aug. 2022).

Our latest Orion Portfolio Solutions Strategist Survey results from Aug. 31 are in. In short, not a lot of optimism yet – except for diversified multi-asset portfolios!

What has driven US stock market gains in recent years? According to Canvas’s August 2022 research paper Why Fundamentals Matter? multiple expansion (i.e., higher valuations) has driven returns over the last decade. For an additional frame of reference, since 1871, multiple expansion only added 6% to total returns, while dividends added nearly 50% (OSAM Research, Aug. 2022).

Did you know? That over the past 94 years (per Ben Carlson’s Jan. 21, 2022 post on A Wealth of Common Sense):

  • Cash (3-month t-bills) has beaten the stock market (S&P 500) in more than 30% of all calendar years (A Wealth of Common Sense, Jan. 2022).
  • Cash has beaten bonds (10-year treasuries) more than 40% of the time (A Wealth of Common Sense, Jan. 2022).
  • And cash has beaten both stocks and bonds in the same year one out of every 8 years, on average (A Wealth of Common Sense, Jan. 2022).
The August employment numbers (non-farm payrolls) last Friday were the highlight of the economic calendar last week. Here’s a recap of the key points from the NFP Report from First Trust on Sept. 2, 2022:
  • Non-farm payrolls increased 315,000 in August, narrowly beating the consensus expected 298,000 (First Trust, Sept. 2022).
  • The unemployment rate rose to 3.7% in August from 3.5% in July (First Trust, Sept. 2022).
  • Average hourly earnings – cash earnings, excluding irregular bonuses/commissions and fringe benefits – are now up 5.2% versus a year ago (First Trust, Sept. 2022).
  • Aggregate hours worked are up 4.0% from a year ago (First Trust, Sept. 2022).
  • The labor force participation rate rose to 62.4%, tying the high so far in the recovery (First Trust, Sept. 2022).
The highlights of this week’s economic calendar will likely be the Fed speech on Wednesday and discussion on Thursday (Calculated Risk, Sept. 2022).

Here’s a nice number – at least it’s continuing to improve. The Atlanta Fed’s GDPNow‘s estimate for real (“after-inflation”) GDP growth (which uses actual economic data for inputs) increased last week by a full 1.0%. The third-quarter 2022 GDP estimate is now at +2.6% (no change from last week) as of Sept. 1, 2022 (GDPNow).

Regarding second-quarter corporate earnings, we only have a few companies left to report. Here’s the summary according to I/B/E/S data from Refinitiv as of Sept. 2, 2022:

  • 22Q2 Y/Y earnings are expected to be 8.5% (no change from last week) (Refinitiv, Sept. 2022). Excluding the energy sector, the Y/Y earnings estimate is -2.1% (an improvement of +0.1% from last week) (Refinitiv, Sept. 2022).
  • Of the 496 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.4% have reported earnings above analyst estimates (Refinitiv, Sept. 2022). This compares to a long-term average of 66.1% and prior four quarter average of 80.6% (Refinitiv, Sept. 2022).
Crypto Corner – Grant Engelbart, CFA, CAIA, Brinker Capital Sr. Portfolio Manager
  • Cryptocurrency prices were mixed in the 7-days ending Labor Day; Bitcoin fell 2% to hover around the $20,000 mark, while Ethereum rose over 3%; Cardano, Polygon, and Ethereum Classic added 8-10% on the week (CoinMarketCap, Sep. 2022).
  • A whistleblower broke the news of a lawyer, seemingly working on behalf of the cryptocurrency Avalanche, who has been bringing unfounded lawsuits against Avalanche competitors to use the discovery process to gather sensitive information (it has of course been denied but more will come out on this) (Arcane, Sept. 2022). Microstrategy CEO and Bitcoin maximalist Michael Saylor was sued by the District of Columbia last week for never paying any state/district income taxes while living there for 10+ years (Blockworks, Sept. 2022). Crypto.com pulled out of their half billion-dollar sponsorship deal with the Champions League (Decrypt, Sept. 2022). Argentina is allowing citizens to pay taxes with stablecoins (Decrypt, Sept. 2022).
  • There was limited ETF activity last week as summer unofficially winds down (Arcane, Sept. 2022).
Additional Resources  

“The world pull[s] at you in an attempt to make you normal. You must work to maintain your distinctiveness," Jeff Bezos from his “Differentiation is Survival and the Universe Wants You to be Typical” 2020 Letter to Shareholders (Amazon, Apr. 2021).

Last week’s Orion's The Weighing Machine podcast was simply golden with SSGA’s Max Gold as we talked about the gold market. This week, we talk to Mike Petro at Putnam Investments. Mike manages Putnam’s small cap value strategies. Mike’s background and outlook was very interesting and it was also fun for me to talk about some of my experiences when I worked at Putnam during college. One story included the day I was walking too fast in a hallway and literally ran into and bounced off of football legend and Hall of Famer John “Hog” Hannah. It seemed to me at the time he wasn’t that happy about the inconvenience. Thanks for listening!

For financial advisors to get this commentary delivered straight to your inbox, please subscribe at orionportfoliosolutions.com/monday-morning-bullets.

Thanks for reading and have a great week! As always, please let us know what we can do better at rusty@orion.com or ben.vaske@orion.com. Invest well and be well.

 

1622-OPS-9/7/2022

Orion Portfolio Solutions, LLC, a registered investment advisor, is an affiliated company of Brinker Capital Investments, LLC, a registered investment advisor, through their parent company, Orion Advisor Solutions, Inc.

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